Commentary: IMF Over view

Gary Peart, CEO of Mayberry Investment Limited, wrote an article on Jamaica's history with the IMF published in yesterday's Observer. Read original here
I will admit that I am not a large fan of the IMF and I hope the Prime Minister is very skeptical of any proposals or contracts that the organization presents as he considers reengaging the organization. You can learn more about Jamaica's rocky relationship with conditionality from the documentary Life and Debt. Views on the benefits and efficiency
of the IMF are highly polarized. I know of two persons, former Chief Economists, who have since leaving the organization come clean on the IMF's various misdeeds. They are Joseph Stiglitz and Davison Budhoo. Mr Budhoo in particular is very critical of the IMF and published his 150 page resignation letter as a book(NOTE: It is very angry). You can read more about the latter here

IMF: then and now
By Gary Peart
Sunday, June 14, 2009

I have learned several things from my research for these articles. As a product of the seventies in Jamaica, for example, and I am sure the same is true for most if not all of my other Jamaican Generation X colleagues, I never gave much thought to the existence of the IMF before the seventies. Yet, it is fair to say that the IMF had a reasonably successful phase one.

Perhaps the unity of purpose that victory often brings as well as the relative homogeneity of the victors in World War II had something to do with that. But when you look at it, the International Monetary Fund did what it was setup to do in the first phase of its existence, 1944, or say 1947, when the fund started making its first loans, to 1971.

Principal among these achievements, as I mentioned in my earlier article (Sunday Finance 07.06.09), was the establishment and maintenance of a stable exchange rate, backed by a gold standard for convertibility. In addition, the fund achieved an unprecedented expansion of international trade. Not that the early years were without controversies and contentiousness. These raged primarily between Britain and the United States.

Both Britain and the United States had concerns that the IMF could become an unwieldy monster that could eventually threaten their own sovereign economic policies if they did not control it from the beginning.

In addition, there were discussions and interim disagreements on: how much money each member should put in; how much each could draw out; how many permanent representatives each member would have; where the UN and the IMF should be located, with Britain lobbying hard for London; and whether the US Dollar should serve as an alternative standard of exchange along with gold.

Disagreements to all these start-up matters succumbed to a consensual approach. As John Maynard Keynes put it in his opening address on the IMF's becoming operational in December 1945, "The IMF fought to find a common standard, a common measure, a common approach and a common rule applicable to each member and not irksome to any."

The IMF started operations with pledges from 39 member-nations totalling US$7.4 billion.

The fund then focused on granting post-war reconstruction loans and facilities to its war-torn European members. The first loan went to France on May 9 1947 for US$250-million. Similar loans to Britain and other European countries in varying amounts followed for the next two-year period, with the first loan to a non-European country going to India in October 1948 for an agricultural development project.

However, during the period 1947-1967, the IMF lent relatively little of its resources. Over half the borrowers at that time were developed nations and they used their loans as short-term, bridging loans, which is what the IMF was setup to do. This was so, in spite of the fact that the majority of the fund's members were, at the time and as they are now poor, developing nations that require access to long-term development capital.

A new set of complaints emerged in the 1950s in which poorer nations, among whom at the time was France, began to quarrel that the Fund's monetary system favoured the developed countries, particularly the United States, since the US dollar was the anchor currency. By the 1960s, the amount of US Dollars circulating in the Fund far exceeded the amount of gold into which they were supposedly convertible and on August 15, 1971, US President Richard Nixon unilaterally declared that the US dollar would no longer be convertible into gold. This, in effect, put an end to the fixed exchange rate regime on which the Bretton Woods Agreement was based and ushered in the era of the floating exchange rate. This gave birth, at the same time, to what one international financial observer called, "a new world of foreign exchange traders, arbitrageurs, financial gurus and casino capitalists."

The cessation of the gold standard gave the IMF an identity crisis, which sent the organisation scurrying back to the drawing board. They quickly found comfort in the fact that they had already been set-up to perform three broad functions:

.Surveillance
.Financial Assistance; and
.Technical Assistance

No longer required to administer the narrow task of its members' compliance with a fixed exchange rate regime, the IMF would now focus on the larger tasks contained in its third broad function: technical assistance.

The IMF would now teach and enforce the rules of how to play in the global arena. Their chosen methodology was through a system of rigid regulations referred to collectively as "conditionality."

Conditionality refers to either a rigorous set of pre-qualification criteria for an IMF loan or an equally rigorous set of targets to be monitored after a loan has been disbursed, or some combination of both.

Conditionality does not exist in the IMF's Articles of Agreement. The requirement was introduced in 1974 at the insistence of the United States over the objections of the rest of the fund's membership, following the breakdown of the gold-backed, par value system in 1971. The rationale was that the developing member-nations that were now calling on the fund, all had long-term, structural adjustment and foreign exchange needs that required extended facilities. Enter Jamaica.

Jamaica officially joined the IMF on February 21, 1963. It is important to remind the reader that the International Monetary Fund is a voluntary membership organisation to which members must pay their dues, or quota, as it is called, in order to remain a member. Members pay their quota and members may borrow relatively inexpensive money. You may say that the IMF functions somewhat like an international credit union for its members.

As at May 31, 2009, Jamaica was a fully paid-up member of the IMF. So, throughout the entire name-calling, the cussing and the passion-filled dramas of breaking off and going back to the IMF during the 1970s and '80s, Jamaica paid its quota.

By the mid-1970s, the Cold War and its effects were at their height in our part of the world. Michael Manley, the prime minister of Jamaica, had made no secret of his party's political leanings towards the socialist ideology and Eastern bloc countries. This was formalised by his declaration of democratic socialism in 1974 and strengthened by his visit to Fidel Castro in Cuba in 1975. So polarising was the political environment in Jamaica at the time that some family members on different sides of the spectrum stopped visiting or speaking with each other and rumours of US-led, destabilising conspiracies were everywhere. It was during these times that the IMF, in the perception of many, became linked with other three-letter US agencies considered to have subversive or sinister motives.

There was much talk and regular IMF visits to Jamaica in this heated environment. Finally, in October 1976, Jamaica received the go-ahead for assistance from the IMF, two months before general elections were held here on December 15 1976. A two-year Stand-By Agreement for US$75 million had been finalised, which was not disbursed until May 1977. By December 1977, the Agreement was suspended because Jamaica failed to meet one of its quarterly targets.

A stand-by Agreement is one that allows a member to borrow for a period up to two years, with payback up to five years after disbursement. Interest was typically 0.5 per cent.

The following year, in January 1978, the IMF was invited back to Jamaica to negotiate a three-year Extended Fund Facility (EFF) for US$240m. This is an arrangement for up to three years, with payback within seven years after disbursement. In order to qualify for this facility, however, Jamaica had to devalue its then two-tiered currency by 13.6 per cent (basic rate) and by 5.2 per cent (special rate) and the country was placed on a crawling peg system of regular devaluations over the next year.

In addition, Jamaica had to levy new taxes on consumer goods; reduce government spending; increase charges for government services; lift price controls; place a ceiling on wage increases; and to slow down state-owned enterprises.

As predictably unachievable as these targets were, Jamaica had no choice but to comply. In June 1979, the EFF was increased to US$428 million, now to cover the costs of severe flooding that month as well as to offset an increase in the price of oil.

Conditionality took its toll and in March 1980, Prime Minister Michael Manley broke off relations with the IMF and announced a new non-IMF path akin to his earlier Emergency Production Plan.

General elections were held on October 30 1980. Edward Seaga and the Jamaica Labour Party were swept into power in what was then the largest majority ever - 51 seats to nine.

The new administration plunged itself immediately into addressing the country's structural adjustment requirements: Seven priority areas were identified for production and foreign exchange earning: garments & sewn products; footwear & leather products; construction materials; food and agro-industry; automotive products; furniture; and electronics & electrical products. Emphasis would be placed on light and value-added manufacturing.

In addition, two new agencies were created - The Jamaica National Investment Promotion (JNIP) to attract overseas investors and to oversee Jamaica's privatisation programme; and the Jamaica National Export Corporation (JNEC) to develop markets for the country's export products.

The oil shocks started hitting in earnest in 1982, culminating with the gas price demonstrations of 1984 that took about ten lives. The Seaga administration continued negotiating with the IMF for a facility with livable terms. Finally, in1987, under the weight of conditionality and growing social unrest, the administration terminated its talks with the IMF. And as is well known the last PNP administration did not renew the country's loan relationship with the IMF during its eighteen year term.

Would a new relationship with the IMF reopen old pitfalls? Is the IMF inescapably a bull in the fragile economies of its developing nation members? Do the borrowing members have any bargaining power? Has the IMF learned anything form the intense unpopularity and negative impact of harsh conditionality? These and other questions are on the minds of not only representatives of small debtor, developing nations.

In a fact sheet published by the IMF dated April 2009, the organisation says that it has, "modernised its conditionality framework in the context of a comprehensive reform to strengthen its capacity to prevent and resolve crises. The new framework ensures that conditions linked to disbursements of IMF financing are sufficiently focused and adequately tailored to the varying strengths of members' policies and fundamentals."

Gary Peart is chief executive officer of Mayberry Investments Ltd. Contact: gary.peart@mayberryinv.com

Source: Jamaica Observer